FTSE 100 sinks under weight of metals

Mining companies led the way down yesterday as US recession fears and credit crunch concerns sent leading shares sharply lower once again.

If the US does go into a prolonged economic downturn, as seems possible, the demand for commodities such as metals is likely to fall, since investors are not convinced that China and other emerging countries can take up the slack. So with copper slipping to a two-week low yesterday, Antofagasta fell 58.5p to 728p; Kazakhmys dropped 112p to £15.51; Vedanta Resources was 135p lower at £21.21; BHP Billiton slipped 93p to £14.97, and Rio Tinto lost 336p to £52.58. The sector has been pushed higher in recent weeks not just by firm metals prices but also by takeover activity. So with no news on that front, investors have banked some profits.

Also hitting sentiment was a rumour that a major US investment firm had run into further financial difficulties owing to its exposure to the sub-prime market. Bear Stearns was one name mentioned, though the company made a point of denying any liquidity troubles.

Even so, the story indicated the continuing uncertainty surrounding the financial sector. So with Wall Street lower by the time London closed, the FTSE 100 fell 70.8 points to 5629.1 with the FTSE 250 down 183.0 at 9670.7.

Ahead of Alistair Darling's first budget tomorrow came news that wholesale prices were at a 16-year high but manufacturing activity was stronger than expected. Richard McGuire, an ING strategist, said: "[This was] a mixed set of data but contained sufficient evidence of inflation risk to ensure the Bank of England proceeds only cautiously on the rate-cutting front. We continue to see the next cut being delivered in May, alongside that month's inflation report."

Britain's housebuilders would welcome a rate reduction, given the downbeat trading news from Bovis Homes yesterday. Bovis fell 71.5p to 506p and dragged the rest of the builders with it. Taylor Wimpey, which is expected to be relegated from the FTSE 100, fell 11.2p to 161.5p.

Another company at risk of falling into the 250 index is the directories group Yell, down another 10.5p to 184.5p on concerns about its trading in Britain and the US.

Defensive stocks were among the main risers as investors sought safe havens. So Associated British Foods added 20.5p to 839.5p, and Tesco was 4.75p better at 410.5p.

British American Tobacco climbed 52p to £18.75p, while Imperial Tobacco rose 37p to £23.81 as it sold its 49.95% stake in the duty-free business Aldeasa for €275m (£210m). It acquired the stake as part of its purchase of Spanish firm Altadis.

Deutsche Bank issued a buy note on Imperial with a £27 price target. It said: "Imperial remains our top European tobacco pick since we believe the market is still not pricing in all the upside of the Altadis acquisition. News over the next 6-12 months should provide reassurance that the deal and savings targets are on track. Although a number of investors seem to be waiting on the sidelines for the rights issue (likely to be launched around its half-year figures on 20 May, we think), we regard this as positive because these marginal buyers could support the stock."

Although most financial shares were weaker, HSBC bucked the trend. It added 11p to 769.5p on suggestions it might raise its stake in China's Bank of Communications above 20% - which would need to be cleared with Beijing. At the same time, analysts at Keefe, Bruyette & Woods issued a positive note on the bank, raising its rating from market perform to outperform and setting an 850p price target.

The insurer Friends Provident edged up 0.9p to 119p before its final results today. Reports over the weekend suggested US private equity group JC Flowers had been waiting for the figures to come out before deciding whether to launch a £3.5bn bid. Traders believe that, although Flowers is interested, a move may not be imminent.

Also reporting today is the project management and services group Amec. Its shares slipped 27.5p to 761p as UBS cut its recommendation from buy to hold and its price target from 905p to 875p.

The data centre specialist Telecity dropped 29p to 212p after it accompanied its full-year figures with a disappointing update.

Lower down the market, the electrical and electronic cable company Volex slumped 22.5p to 71pp in the wake of a warning that it did not expect to be profitable in the second half of the year following lower-than-expected order levels and worsening trading conditions.

Finally, the online marketing group TMN - formerly Themutual.net - jumped 7p to 46p as it revealed it had received a bid approach.

Duty-free reviver

One not so obvious beneficiary of BAA's disposal of its World Duty Free Europe shops could be WH Smith, down 11p to 361.75p yesterday. BAA sold the business for £546m, about £100m more than market estimates, which equates to 14.7 times last year's earnings. Analysts at Oriel Securities said putting WH Smith's travel business, which has higher profitability than World Duty Free, on a similar multiple would imply a value of £690m, some £83m higher than WH Smith's £607m market capitalisation. "Even if investors don't like the WH Smith high-street business, putting a negative value of £83m on it, despite its ability to generate operating cash of over £50m is indeed harsh," said Oriel.